Fourth-quarter results, which beat analysts’ estimates, added further evidence of BTG Pactual’s ability to generate fee-based income, mitigate the weighting of trading activities in the bank’s revenue mix and take advantage of market conditions even in challenging times, Esteves said in a conference call.

Annualized return on equity, a widely followed gauge of profitability in the financial industry, “should post readings on top of 20 percent - to me it’s a level that could be reached in line with our goals for the business”, Esteves said.

That level is way above the average 16 percent ROE for the three largest private-sector commercial lenders at the end of last year.

Shares in the company hit an all-time intraday high as BTG Pactual’s third straight quarterly profit beat partially eased concerns that the bank is too reliant on trading-related activities for growth. Units, a blend of common and preferred shares of BTG Pactual’s investment-banking and private equity divisions, gained as much as 2.4 percent to 36.93 reais.

São Paulo-based BTG Pactual reported net income of 854 million reais ($436 million) in the fourth quarter, up 7.7 percent from the prior three months, as a surprising jump in asset management proceeds helped offset higher expenses and weak advisory and trading revenue.

A Thomson Reuters poll of five analysts had forecast profit of 677.5 million reais.

BTG Pactual’s ROE unexpectedly rose to 25.1 percent at the end of December from 24.9 in September. The poll had predicted ROE at 20.6 percent.

“Another sound beat provides further evidence of the benefits of BTG’s well diversified and unique business model,” said Mario Pierry, an analyst with Deutsche Bank Securities.

“We also liked the solid pick-up in asset and wealth management revenues, which are more recurring and fee-based, and thus are traditionally assigned higher trading multiples by the market.”

Total revenue rose 12 percent on a quarter-on-quarter basis to 1.891 billion reais, topping the 1.35-billion-reais estimate in the poll. Receipts from asset management services more than tripled, offsetting an 18 percent fall in investment banking fees, a 47 percent drop in sales and trading income, and a decline in revenue from principal investments of 9.5 percent.

Esteves said the buoyant results in asset management were driven by a 13 percent jump in money under management and a gain in the average return on assets. Returns in the division rose following a change in the mix from traditional fixed-income instruments to products that charge higher fees.

Equally, the division received a boost from the one-time collection of performance fees from global hedge funds, which close their accrual period at year-end, as well as the payment of performance fees by a group of investors who partially exited a BTG Pactual-managed real estate fund.

STILL, WORRIES LINGER

The results signal that BTG Pactual’s activity in 2013 might be bolstered as risk aversion eases amid escalating confidence in the developed world. Esteves has moved aggressively to expand BTG Pactual’s involvement in risky trades in U.S. real estate markets, emerging-market bonds and equities and other investments in Europe.

In the call, he said Brazil’s economy could grow by around 3 percent while capital market activity should be stronger than in 2012. A sagging deal flow for mergers and acquisitions, and for bond and equity sales in Brazil in the quarter, hurt BTG Pactual’s revenue but helped keep compensation expenses in check.

Principal investments - or gains from investing the bank’s own money on hedge funds, buyouts and real estate - fell to the lowest level in a year after BTG Pactual’s merchant banking unit failed to make a relevant divestment in the quarter.

Compensation expenses fell 21 percent, a little more than the 20 percent drop estimated in the analyst poll. Tumbling fees from debt and equity sales and M&A deals led to a cut in banker bonuses. Sales, general and administrative expenses rose 52 percent in the quarter, in line with estimates in the poll.

The quarterly performance of value-at-risk, or how much BTG Pactual traders might lose in one day, was far worse than expected. VaR, as the gauge is known, jumped to 109.2 million reais in the fourth quarter from 88 million reais in the third.

The adverse result in VaR sparked worries that BTG Pactual could be deploying too much capital on proprietary trading, masking elements of a business model for investment banks that some analysts see as inherently unstable.

“Though our first take is mostly positive, fourth-quarter results raise questions about the sustainability and quality of results - how much did performance fees boost the bottom line, what kind of returns on allocated capital is principal investments generating?” said Saúl Martínez, a senior analyst with JPMorgan Securities.

Bolstering profit, BTG Pactual’s loan book rose 60 percent in 2012, ending the year at 33.77 billion reais. Esteves, 44, has used proceeds from a $1.96 billion initial public offering last year to extend more lending to BTG Pactual’s growing portfolio of corporate clients in Brazil and other Latin American countries.

Esteves said “there is still some ample room to increase our loan book, we believe we haven’t reached any limit in lending yet”.

BTG Pactual’s loan book could grow to about 42 billion reais, or roughly three times the bank’s capital base, without putting capital under pressure, Chief Financial Officer Marcelo Kalim said in another call.